The Role of Government in
Economic Development
November 2006
Oh-Seok Hyun, Ph.D.
President
Trade Research Institute
Korea International Trade Association
Contents
Ⅰ
Introduction
Ⅱ
Overview of the Role of Government
Ⅲ
Korean Experiences
Ⅳ
Mechanism of Government Interventions
Ⅴ
Globalization and the Role of Government
Ⅵ
Conclusion
Korea’s Economic Development & Economic Crisis Management
Ⅰ. Introduction
1 - 1. Korea’s Economy
World ‘s 12th largest Economy
GDP
12th
Trade
12th
Growth Rate
3th
Foreign Reserves
5th
z GDP(2005) : $ 788 Billion
- Malaysia + Indonesia + Thailand + Philippines = $ 687 Billion
- Russia = $ 764 Billion
z Per Capita GNI(2005) : $ 16,291
z Trade Value(2005) : $ 545 Billion
- Exports : $ 284 Billion (12th)
- Imports : $ 261 Billion (13th)
z Average Growth Rate(1970~2005) : 7.0% (3th)
z Foreign Reserves (Jun 2006) : $ 224 Billion (5th)
Korea’s Economic Development & Economic Crisis Management
Ⅰ. Introduction
1 - 2. Government’s Role
• Guardian of Political Stability
Mobilization and
Allocation of Resources
Stabilization of the
National Economy
• Provider of Development Funds
• Major Investor in Industries of the Country
• Investment Decision of Private Enterprises
• Motivator behind the Scene
Promotion of Technological
• Preservation of the Law and Order
Development
• A Strong Agent of Social Change
• Protector of Social Security
Korea’s Economic Development & Economic Crisis Management
Ⅱ. Overview of the Role of Government
2 - 1. The Neoclassical View
z A Stable Macroeconomic Environment
z A Reliable Legal Framework
Getting
the basics
right !
z Orientation of International Trade
z The Absence of Price Controls & other
Distortional Policies
z Investment in People, Education, Health
z Stress on Human Capital
Korea’s Economic Development & Economic Crisis Management
Korea’s
Economic
Miracle
Ⅱ. Overview of the Role of Government
2 - 2. The Revisionist View
Korea does not wholly conform to the neoclassical model !!
z Industrial policy and interventions in financial markets are not easily
reconciled within the neoclassical framework.
z Some policies in some economies are much more in accordance with
models of state-led development.
z The policy mixes used by the Korean government were diverse and
flexible
Korea’s Economic Development & Economic Crisis Management
Ⅱ. Overview of the Role of Government
2 - 3. The Market-Friendly View
The appropriate role of the government in the market-friendly strategy
(World Bank, World Development Report 1991)
z Securing sufficient investment in
human resources
z Ensuring an environment that
promotes competition among
private enterprises
z Maintenance of an economic
system open to international trade
Otherwise,
the government
intervention
will do more harm
than good !!
z Maintenance of stable macro
economy
Korea’s Economic Development & Economic Crisis Management
Ⅱ. Overview of the Role of Government
2 - 4. The Functional Approach
Korea’s rapid growth based on “three functions of growth” :
Accumulation / Efficient allocation / Rapid technological catch-up
Fundamentals
Fundamentals
z Macroeconomic stability
z Investment in human capital
z Stable and secure financial
Selective
SelectiveInterventions
Interventions
z Mild financial repression
(positive but low interest rate)
z Directed credit
z Selective industrial promotion
system
z Limited price distortions
z Openness to foreign
z Trade policies for
nontraditional exports
technology
Korea’s Economic Development & Economic Crisis Management
Ⅱ. Overview of the Role of Government
Competitive
CompetitiveSystem
System
Very simple nonmarket allocation
rules, such as access to rational
credit for exporters
Very complex coordination
of private investment in the
government-business
deliberation councils
Major
Majorcharacteristics
characteristicsof
ofthe
thecompetitive
competitivesystem
system
The government distributes rewards on the basis of performance.
Selective interventions must be disciplined by competition.
Korea’s Economic Development & Economic Crisis Management
Ⅱ. Overview of the Role of Government
2 - 5. Overview of the Role of Government
A high-quality civil service that has the
capacity to monitor performance and is
insulated from political interference is
essential to contest-based competition.
A high-quality civil service also augments
a government’s ability to design and
implement non-contest-based policies.
Korea’s
Korea’sEconomy
Economy
Pragmatic flexibility in the pursuit of
economic objectives-the capacity and
willingness to change policies-is as much
a hallmark of the Korean economy as any
single policy instrument.
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
3 - 1. Review of Development Strategies in Korea
(1) Launching economic development in the 1960s
Government
Government
Strategies
Strategies
z Economic development
→ Outward-oriented development strategy
z Establishing new institutions and
Execution
Executionof
of
Strategies
Strategies
strengthening existing organizations
to mobilize both internal & external resources
→ EPB, tax administration, foreign capital
promotion act
Results
Results
z Eliminating the fiscal deficit
z Increasing savings deposits
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
※ One of the most important reforms was a revamping of trade policy.
z The Korean currency, the won, was devalued by nearly 100 percent.
z A unified exchange rate system was adopted that eliminated the bias
against the export sector.
z Short-term export credit was made available at a preferential rate.
z Tax rebates were allowed on raw materials imported for the production
of exports.
z A number of free trade zones were also established.
z Customs procedures were simplified.
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
(2) Extensive Intervention in the 1970s
Policy
Policy11::Modernization
Modernizationof
ofRural
RuralAreas
Areas
z Boosting price supports for the major grain crops in 1969
z “Saemaul Undong” (New community movement) in 1971
Policy
Policy22::Development
Developmentof
ofthe
theHeavy
Heavy&&Chemical
ChemicalIndustries
Industries
z To develop a new source of strategic export industries
z To promote the import substitution of intermediate materials and
capital goods
Heavy and Chemical Industry Development Plan (1973)
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
※ To achieve the necessary economy of scale in a limited domestic market,
the government made the following efforts ;
z Permitting monopolistic production in a few industries.
z Establishing the National Investment Fund which was channeled into
heavy industry projects at lower interest rates.
z Setting up and maintaining high protective barriers for these “infant”
industries until they became internationally competitive.
z Providing many incentives for training workers and for R&D.
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
(3) Economic Liberalization in the 1980s
Solving
Solvingthe
theeconomic
economicproblems
problems
from
fromthe
thedevelopment
developmentof
ofthe
theheavy
heavy&&chemical
chemicalindustries
industriesininthe
the1970s
1970s!!!!
z Strong economic stabilization measures to curb the inflationary trends
z Economic deregulation for reducing government intervention and
for allowing more individual freedom
z Steps toward the internationalization & liberalization of the economy
z Fair trade and competition policies to reduce the inefficiencies of
domestic industrial structures and curtail abusive practices of
monopoly enterprises
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
(4) Shifting towards New Economy in the 1990s
Korea
Koreamust
mustdevelop
developaanew
newpolicy
policyframework
framework
to
tosustain
sustainits
itseconomic
economicdevelopment
development!!!!
Democratic principles should replace government guidance & control
as the economy’s engine of growth.
Five-Year Plan for
z Securing the economic potential
the New Economy
z Expanding the foreign markets
(1993-1997)
z Improving the standard of living
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
z Freezing hiring at government agencies
Fiscal
Fiscal
Reform
Reform
z Establishing a global income tax system
z Levying comprehensive land taxes on the basis
of officially announced land prices
z Relaxing regulations
Financial
Financial
Reform
Reform
z Removing business boundaries of financial
intermediaries
z Liberating foreign exchange and overseas
capital transactions
z Relaxation of regulations on all aspects of
Administrative
Administrative
Reform
Reform
business activities
z Change in the attitudes of government officials
toward public service.
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
(5) Crisis and Structural Reforms after 1997
Financial Crisis
(1997)
Consecutive bankruptcies of
Foreign banks refused to roll over
several large chaebol, coupled
credit lines to Korean financial
with financial crisis in Thailand
institutions and foreign investors
and other East Asian countries.
pulled out of Korea en masse.
By mid-December 1997,
Korea’s foreign exchange reserves
were almost depleted.
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
Crisis
Crisis&&Structural
StructuralReforms
Reforms!!!!
z By and large, the three-year IMF-supported program has been
successful and the objectives of the program has been met.
z Bold policies and a commitment to reform have led to the overhaul of
many domestic institutions and increased the market orientation of
the economy.
z As a result, many of the weaknesses that contributed to the crisis in
1997 have been addressed.
z But much remains to be done to ensure that the gains endure and that
the Korean economy is sufficiently sound and flexible to adapt and
prosper as conditions change.
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
3 - 2. Pattern of Economic Management
(1) Leadership Commitment to Economic Development
Syngman Rhee in the 1950s
VS
Park Chung-Hee in the 1960s
“Anti-communism”
“National modernization”
“Antipathy toward Japan”
“Economic planning”
“Patriotism”
“Administrative reform”
President
PresidentPark
Parkargued
arguedand
andstressed
stressed;;
z Economic development was the main course of national modernization.
z A self-supporting economy could not be achieved only by foreign aid.
z The need for purposeful planning in economic development.
z The need for attracting foreign loans at the early stage of industrialization.
Korea’s Economic Development & Economic Crisis Management
Ⅲ. Korean Experiences
(2) Functional Realignment through Organization Reform
EPB
EPB
z This organization was responsible for economic planning, national
budgeting, foreign capital management, and statistics.
z In 1963, the role and functions of the Board were broadened
when it was decreed that the Minister of EPB would concurrently
hold the position of Deputy Prime Minister.
z In line with the greater emphasis on economic planning, the
Office of Planning and Coordination was established under
the Prime Minister in 1961.
z The organization has since been responsible for assisting the
Prime Minister in evaluating and monitoring the performance of
major projects and programs.
Korea’s Economic Development & Economic Crisis Management
Ⅳ. Mechanism of Government Interventions
4-1. National Budget
Government Spending
Mobilization
Mobilization&&Allocation
Allocation
of
ofResources
Resources
Inflation
Inflation
< Government Expenditure of GDP >
18.0
(%)
17.2
17.0
16.0
15.0
14.6
14.0
To
Tostabilize
stabilizethe
theeconomy,
economy,
government
governmentspending
spendingwas
wasreduced
reduced
from
from17.2%
17.2%of
ofGDP
GDPduring
during
1960~1964
1960~1964to
to14.6%
14.6%during
during
1965~1969.
1965~1969.
13.0
1960-64
1965-69
Korea’s Economic Development & Economic Crisis Management
Ⅳ. Mechanism of Government Interventions
< Government Expenditures As a (Percentage of GDP) >
Period
Non-Defense
Defense
Total
1960~1964
12.2
5.0
17.2
1965~1969
10.7
3.9
14.6
1970~1974
11.4
5.0
16.4
1975~1979
12.4
5.4
17.8
1980~1984
14.7
5.1
19.9
1985~1989
13.5
4.3
17.8
1990~1997
17.3
3.4
20.6
1998~2003
22.2
2.7
25.0
Korea’s Economic Development & Economic Crisis Management
(%)
Ⅳ. Mechanism of Government Interventions
< Government Consumption, Savings, and Fixed Investment >
Period
Consumption
Savings
(%)
Fixed Investment
1960~1964
12.3
-1.0
3.7
1965~1969
10.0
4.2
5.6
1970~1974
9.6
3.7
3.9
1975~1979
10.8
5.5
4.2
1980~1984
11.9
6.1
4.6
1985~1989
11.0
6.8
4.0
1990~1997
11.6
8.7
5.1
1998~2003
12.8
10.8
5.6
Korea’s Economic Development & Economic Crisis Management
Ⅳ. Mechanism of Government Interventions
4-2. Public Enterprise
Public enterprises constituted a leading sector in the national economy
z Public enterprises created “forward linkage” effects, transmitting growth
to other industries, and contributed to capital formation, value-added,
employment & technological development.
The government’s purposes in operating public enterprises have been ;
z To promote basic industries or public infrastructure activities that required
capital-intensive technology
z To undertake large-scale business operations under monopolistic or
oligopolistic conditions
z To cope with market failures involving entrepreneurial inadequacies, the
imperfect capital market, shortage of market information, and
unwillingness of the private sector to bear the risk
Korea’s Economic Development & Economic Crisis Management
Ⅳ. Mechanism of Government Interventions
4-3. Regulatory Measures
The
ThePrice
PriceControl
ControlAct
Actof
of1961
1961
z To control the prices of five essential commodities ; rice, barley, coal,
anthracite and fertilizer
The
TheMonopoly
MonopolyRegulation
Regulation&&Fair
FairTrade
TradeAct
Actof
of1980
1980
z To ensure free market competition and protect consumers by controlling
the abuse of monopolistic or oligopolistic power and prohibiting the
formation of new companies wielding such povver.
The
The1997
1997Basic
BasicAct
Acton
onAdministrative
AdministrativeRegulation
Regulation
z To establish a comprehensive and long-term approach to regulatory
reform aimed at promoting private-sector initiative and creativity as a
means to improve the quality of life and enhance national competitiveness
Korea’s Economic Development & Economic Crisis Management
Ⅳ. Mechanism of Government Interventions
The
TheRegulatory
RegulatoryReform
ReformCommittee(RRC)
Committee(RRC)ininthe
thePrime
PrimeMinister’s
Minister’sOffice
Office
z The committee was given the task of eliminating half of the 11,095
existing regulations within the year beginning in April 1998.
z 49 percent of regulations were abolished, and 43 percent of the
remaining regulations were improved.
z The reform process involved the submission of 344 pieces of legislations
to the National Assembly, of which nearly 300 have been approved.
z One particular concern was the widespread use of “administrative
guidance”
z The RRC identified 1,849 “informal regulations” that had no legal basis.
162 were formalized, while the remainder were abolished.
z Finally, to improve transparency, the RRC has compiled a list of all
regulations currently in force.
Korea’s Economic Development & Economic Crisis Management
Ⅳ. Mechanism of Government Interventions
< Detailed measures of regulatory reform by area >
Area
Detailed Measures
Foreign
Direct
Investment
•
•
•
•
Reducing number of restricted areas
Facilitating land purchase by foreigners
Improving financial environment for FDI
Improving living conditions for foreigners in Korea
Business
Enterprise
Activities
•
•
•
•
Easing of land-use regulations
Liberalization of rules on factory location
Easing reform of controls on housing and construction
Liberalization of regulations on public utilities
Finance,
Retail Sales,
Trade
•
•
•
•
Easing entry barriers into the financial sector
Liberalization of distribution and transaction facilities
Improvement of freight transportation in the retail sector
Liberalization of trade policies
Inconveniences
in the Lives of
Citizens
•
•
•
•
Cars, construction, environment and fire regulations
Improving procedure for complaints about regulations
Reducing administrative burdens
Increasing transparency
Korea’s Economic Development & Economic Crisis Management
Ⅳ. Mechanism of Government Interventions
The
Thefocus
focusof
ofthe
theRRC
RRCisisshifting
shiftingto
tonew
newtasks
tasks!!!!
z First, it is moving away from a quantitative approach and towards a focus
on improving the quality of the remaining regulations.
( “Comprehensive Regulatory Improvement Plan” )
z Second, the RRC is supporting regulatory reform at the local government
level.
z Third, the RRC is trying to include non-governmental organizations,
which now number 8,000, more fully in the work of regulatory reform.
Korea’s Economic Development & Economic Crisis Management
Ⅳ. Mechanism of Government Interventions
4-4. Inducement Policies
Tax Policies
for Desired
Resource Allocation
Financial Sector as a
Tool for Supporting
Development Plan
Foreign
Exchange
Policy
Tax incentives &
Disincentives
The Interest Realization
Program(1965~1968)
Floating Foreign
Exchange Rate System
Preferential depreciations,
Subsidies,
Tax exemptions,
Differential commodity
tax rates …
Low interest rate
▼
High interest rate
in
both deposits and loans
Financing of
development projects,
Encouraging exports &
discouraging imports
Korea’s Economic Development & Economic Crisis Management
Ⅴ. Globalization and the Role of Government
5-1. Korean Economy and the Government’s Roles
Blocks
Blocksto
tothe
thepolicy
policyregime
regimeshift
shifttoward
towardgreater
greaterprivate
privatesector
sectorparticipation
participation
z Many private economic agents have lost their sense of independence and
fear that liberalization may create chaos.
z Active government economic management has created various barriers
to entry.
z The widespread distortion in the economic incentive structure has tended
to discourage the individual economic agent’s will to economize and
motivation for innovation.
z With an excess demand for intervention beyond its true capability or
necessity, the effectiveness of government economic management has
been rapidly reduced.
Korea’s Economic Development & Economic Crisis Management
Ⅴ. Globalization and the Role of Government
5-2. The Evolving Role of the Government
The
TheHayekian
HayekianPhilosophy
Philosophy::Market
MarketOrder
Order&&Competition
Competition!!!!
z Preserving the spontaneity and endogeneity
of the market order
Government Role
z Cultivating a better environment for the
working of the market order
z Establishing a regime of fair competition
in the economic and social system
The
Therole
roleof
ofthe
thegovernment
governmentshould
shouldbe
belimited
limitedto
todefining
defining
the
theeconomic
economic&&social
socialenvironments.
environments.
Korea’s Economic Development & Economic Crisis Management
Ⅵ. Conclusion
z The roles that the government plays in the national economy and its choice
of instruments depend on the pattern of interaction between the polity and
the economy.
Private
PrivateSector
Sector
Private
PrivateSector
Sector
Government’s
Government’sRole
Role
Private
PrivateSector
Sector
z In this process, the government as an agent of polity tries to influence the
private sector in economic development by utilizing either its own financial
resources or state power as instruments.
Korea’s Economic Development & Economic Crisis Management
Ⅵ. Conclusion
Through
Throughthe
theprocess
processof
ofinteraction
interaction
z The Korean government played its role in promoting economic
development with a mixture of diverse policy measures.
z This policy mix was comprised of complementary use of finance and
power as instruments for intervention in the private sector,
z as well as of the option between direct and indirect government control
over business.
z And the style of the political leadership and the degree of legitimacy in
exercising government influence are additional factors shaping the
government’s role.
Korea’s Economic Development & Economic Crisis Management
Thank you !
Korea’s Economic Development & Economic Crisis Management